Local shares face heavy fallout from Greek exit

The Australian market is particularly vulnerable to the global fallout of a Greek exit from the euro zone despite a lack of direct trading links to Greece, strategists say.

Last week the fresh ructions in Europe sent the sharemarket to its biggest weekly loss in eight months, suggesting that even the threat of a Greek exit is enough to unnerve local investors.

According to Merrill Lynch foreign exchange strategist Athanasios Vamvakidis, should anti-austerity parties emerge triumphant from the June elections and the European Union, the European Central Bank and the International Monetary Fund, the so-called troika, refuse to release further funds, Greece will run out of money as early as July, raising the spectre of default and exit in the very near term.

Deutsche Bank equity strategist Tim Baker said Australia’s sharemarket is disproportionately vulnerable to the shock waves that would follow a Greek exit, as it is dominated by the two sectors that would be hit the hardest – banking and resources.

“The Australian market could be heavily affected, more than a lot of other markets, by concerns about Europe," Mr Baker said. “It’s just the composition of our market – big banks and big commodity plays. Markets full of telecommunications or utility companies, well, it’s harder for them to be affected. But if you’re full of companies exposed to global growth, chances are you will be vulnerable."

Resource companies were hit particularly hard last week, with BHP Billiton slumping 9 per cent to its lowest in three years, and Rio Tinto falling 10 per cent. The slump in resource stocks has been given added speed by the release of Chinese economic data in the second week of May suggesting a sharper economic slowdown than many economists expected. That, in turn, has led to doubt that China would be totally resilient to a crisis emanating from Europe, leading to concerns about the second-hand impacts on Australia. Europe is a pretty significant export market for China, Morgan Stanley chief metals economist Peter Richardson said.

“I think there would probably be two effects we would identify – one is the direct effect on exports if the consequence of a Greek exit from the euro was a further weakening in the peripheries, and the other in the stronger core of the euro zone as a result of the impact on the banks and credit availability and lending."

Mr Richardson added that much of the potential impact of a Greek exit had already been priced into metals, but there was the possibility of further downside.

Related Quotes

Company Profile

“Given where prices are relative to cost it does seem to us that copper and tin, which are further above their marginal costs than any other metal right now, are probably slightly more vulnerable than others," Mr Richardson said.

“The prospect of weaker demand in Europe for raw materials more broadly and particularly for iron ore and coal will probably mean that displaced demand in Europe will have to find a home in other parts of the world unless producers are prepared to cut output. In coal that is possible, but that certainly doesn’t seem the case in iron ore."

Commonwealth Bank chief currency strategist Richard Grace suggested that if Greece made a formal exit from the euro, the Australian dollar, often treated as a proxy for Chinese growth, could fall as low as US89.9¢. If contagion to Portugal, Ireland, Italy and Spain was then realised, Mr Grace tipped the dollar to go as low as US70¢.

The strain on Australian banks in the event of a Greek default would primarily come from increased funding costs if European banks put a halt on lending. Five-year credit default swaps on Australia’s big four banks reached 1.91 per cent at the end of last week, a five-month high, indicating concerns are rising.

Several chiefs of the major banks, including ANZ’s
Mike Smith
, have stressed they have raised enough funds for the next year, making them immune to any jumps in costs.

But according to Equity Trustees fund manager Zia Rahman, that will matter little in terms of sharemarket reaction, particularly if there is a bank run in Europe.

“[But] they have looked at the scenario and already locked in a lot of funding. They have been aggressively chasing domestic deposits as well. That’s considered a bigger part of the balance sheet funding nowadays. That gives you a bit of a buffer."

The S&P/ASX 200 banking index has fallen 9.1 per cent since the beginning of May.